Draghi Fuels Junk Sales as Issuers Go to Europe: Credit Markets

After the European Central Bank helped push borrowing costs for the riskiest companies toward a record low, Swiss packaging company SIG Combibloc Group AG scrapped plans to help fund its buyout with dollar-denominated bonds, issuing the entire amount this month in euros. When U.S. chemical company Solenis LLC needed funding for an acquisition, it turned to Europe’s market for leveraged loans, where it saw cheaper terms on $96 million of debt.

Just as the world’s riskiest borrowers flocked to the U.S. while the Federal Reserve was plying its economy with unprecedented cash, companies are again following the money as the stimulus tide shifts. That’s breathing new life into Europe’s speculative-grade debt market, which has lagged behind the U.S. during the past six years as the region’s economy battles deflation.

“Suddenly Europe became more appealing,” Michael Marsh, Goldman Sachs Group Inc.’s London-based head of high-yield and leveraged-loans capital markets for Europe, the Middle East and Africa, said in a telephone interview.

Busy Start

Speculative-grade borrowers have issued the equivalent of $20 billion of bonds in Europe this year, more than double the amount sold by this time in 2014, according to data compiled by Bloomberg. That’s the busiest start to a year ever. In the U.S., sales are up 10 percent to about $35 billion.

Europe has also been more insulated from the oil-price slump that roiled U.S. markets. When compared with the U.S., the European high-yield market has a more “modest” direct exposure to energy, Marsh said.

“It feels like we could have a nice window” opening up for new borrowers in the leveraged-finance market in Europe, Jim Bonetti, the head of U.S. leveraged finance syndicate at Morgan Stanley in New York, said in a phone interview.

Less than a year ago, Morgan Stanley was talking to clients about how much better terms were for borrowers in the U.S., Bonetti said. The dollar market for junk bonds was in the midst of unprecedented issuance, and yields reached a record-low 5.69 percent in June.

“Today we have seen a 180-degree turn,” he said.

Altice Deal

Altice SA’s debt deal last month shows why borrowers are now favoring Europe. The Luxembourg-based cable and telecommunications company offered eight-year bonds in both dollars and euros to help pay for its purchase of Oi SA’s Portuguese phone assets but is paying 1.38 percentage points less for the euro portion, Bloomberg data show.

With average yields of 4.37 percent, junk bonds in Europe are costing issuers 2.26 percentage points less than that for U.S. notes, according to Bank of America Merrill Lynch index data. That’s 0.6 percentage point away from the record savings companies were seeing in December.

Private-equity firm Onex Corp. had planned on financing its purchase of SIG Combibloc in part with a bond offering denominated in euros and dollars. The U.S. piece of the dual-currency deal was dropped, according to a person familiar with the financing earlier this month, who asked not to be identified citing lack of authorization to speak publicly.

‘More Advantageous’

SIG ended up selling 675 million euros of 7.75 percent notes this month at par after back-to-back meetings last month with investors in Europe and the U.S.

“Pricing in the European market is cheaper because of the ECB intervention,” said John Cokinos, a New York-based managing director in Royal Bank of Canada’s high-yield and loan capital markets group. “We’re certainly telling them to think more about that,” he said of the bank’s conversations with corporate clients.

For Wilmington, Delaware-based Solenis, “it was more advantageous to raise euro debt,” Mike O’Donnell, the specialty chemical maker’s treasurer, said in a telephone interview.

The company, which has a regional center in Switzerland, already had a euro-denominated loan, obtained last year to help finance its buyout by Clayton, Dubilier & Rice, Bloomberg data show. When it returned to debt markets to fund its acquisition of Clarkston, Washington-based Clearwater Specialties LLC, O’Donnell said prices in the loan market suggested it was cheaper to raise capital in Europe.

Its $630 million term loan was quoted at 97.8 cents on the dollar on Feb. 9, compared with 98.9 for the 230 million-euro loan that was already in place, according to quotes compiled by Bloomberg.

“ECB bond buying will continue to make the market fairly liquid,” Kevin Connell, a London-based managing director in Royal Bank of Scotland Group Plc’s high-yield syndicate business, said in a phone interview. “Demand could outstrip supply.”

To continue reading this article you must be a Bloomberg Professional Service Subscriber.